Caledonian Bank files for bankruptcy

Caledonian Bank has filed for bankruptcy protection in the U.S. Bankruptcy Court of the Southern District of New York.

Judge Martin Glenn on Monday had issued a temporary restraining order granting a request by controllers of the bank who said that without bankruptcy protection, depositors could “race to the courthouse” to claim cash from the bank’s U.S. accounts to the detriment of all creditors.

The bank said the freeze order was the reason for the bankruptcy. The order was placed on the bank’s U.S. assets after the U.S. Securities and Exchange Commission sued Caledonian Bank and its broker-dealer Caledonian Securities for alleged U.S. securities law violations.

“The freezing of such a large percentage of the [bank’s] assets had a crippling effect on the [bank’s] liquidity,” the filing stated.

Caledonian said it had hoped that a modified temporary restraining order, which reduced the asset freeze to $76 million of the bank’s U.S. assets, would calm depositors and allow the bank to meet withdrawal demands.

However, upon learning of the lawsuit and the temporary restraining order, customers sought to withdraw US$68 million last week alone, and Caledonian had to suspend operation of all services. The Cayman Islands Monetary Authority, the bank’s Cayman regulator, appointed controllers for the bank on Feb. 10, four days after an SEC lawsuit alleged that Caledonian Bank and Caledonian Securities, as well as three offshore broker-dealers, had sold unregistered, restricted shares that were part of penny stock fraud schemes.

The bank has approximately 1,550 customers and nearly 1,900 active accounts. Slightly more than half of the bank’s assets are held in the United States in a cash account with Northern Trust International Banking Corp. and a securities account with Morgan Stanley Smith Barney. Caledonian executed U.S. banking transactions through its correspondent bank relationship with Northern Trust.

Caledonian’s main business activities are the issuance of financial instruments, fiduciary and administrative services, and custody services to the customers of its broker-dealer affiliate Caledonian Securities. The bank also accepts fixed-rate deposits.

About $520 million of the bank’s $560 million total liabilities are in demand deposits. As of Jan. 31, the bank had assets of $585 million, two-thirds of which are held in cash on deposit with other financial institutions and liquid fixed instruments.

The temporary restraining order freezing $76 million of Caledonian’s assets in the two U.S. accounts remains in effect until March 27.

Sale of trust and director services business

Meanwhile, two Caledonian companies that have not been placed into controllership by the Cayman Islands Monetary Authority are about to be sold to a financial services group from the Bahamas.

Sterling Financial Group Inc., a private equity, real estate investment and development group based in Nassau, Bahamas, announced that it has agreed terms to purchase Caledonian Trust (Cayman) Ltd. and Caledonian Directors Ltd.

The transaction still requires the approval of the Cayman regulator.

A press release by Caledonian Global Financial Services said the acquired companies are going to be renamed Sterling Trust (Cayman) Ltd. and Sterling Directors Ltd. and will maintain their current offices and staff.

“Once the approval of the Cayman Islands Monetary Authority is obtained, the new parent company expects to invest heavily in additional technology and infrastructure,” the press statement claims.

Sterling Financial Group is headed by Canadian real estate investor and developer David Kosoy.